<p>It is well known that the emergency fund is an absolute necessity for every family. During the Covid time, it was top of mind for people, however it is not given that much importance now. Life is full of surprises – not all pleasant and that’s where the emergency fund will come in use. </p>.<p>The emergency fund is an amount kept aside for use in emergencies like a sudden medical situation, job loss etc. The amount recommended is 6-12 months of essential expenses. Emergency fund should be used only for contingencies and not to fund non-essential expenses like buying a gadget. </p>.<p>The emergency fund should be easily accessible at all times, as the crisis can strike anytime. Thus, investments like gold in physical form (coins, jewellery) are not a good choice for an emergency fund. For one, they cannot be sold in the middle of the night and even selling gold for cash is not easy. Some argue that a gold loan can be availed in such situations, but this will also take a couple of days. </p>.<p>Returns should not be the criteria while choosing the investment for the emergency fund. Volatile investments like equities and products with lock-in like insurance plans are to be completely avoided. NPS Tier 2 is being considered for emergency fund as it has no lock-in. Firstly, the redemption proceeds from NPS Tier 2 get credited after 2 business days provided redemption has been placed before 10.30am. Also, there is an equity component in NPS which makes it unfit to use for contingencies. </p>.<p>Arbitrage funds are also in the radar as they have lower taxation as compared to debt funds. However, arbitrage funds are suggested to be held for at least one year as the arbitrage opportunities may be limited in the short term. Liquid funds and ultra short duration funds are a good choice, since they invest in high-quality, short-term debt instruments. Even liquid funds and ultra short duration debt funds have a redemption cycle of t+1. Thus, having a part of the fund in the savings account would be useful. </p>.<p>A combination of the savings account, fixed deposits and ultra short duration debt funds works well for the emergency fund, as funds would be accessible at all times. All other investments like arbitrage, gold etc. should be used for other goals. </p>.<p>Finally, the fund needs to be replenished if used. Often, due to being preoccupied by the emergency, one forgets to rebuild the fund. </p>.<p>An emergency fund is your financial cushion that turns a crisis into a manageable setback and prevents a debt buildup.</p>
<p>It is well known that the emergency fund is an absolute necessity for every family. During the Covid time, it was top of mind for people, however it is not given that much importance now. Life is full of surprises – not all pleasant and that’s where the emergency fund will come in use. </p>.<p>The emergency fund is an amount kept aside for use in emergencies like a sudden medical situation, job loss etc. The amount recommended is 6-12 months of essential expenses. Emergency fund should be used only for contingencies and not to fund non-essential expenses like buying a gadget. </p>.<p>The emergency fund should be easily accessible at all times, as the crisis can strike anytime. Thus, investments like gold in physical form (coins, jewellery) are not a good choice for an emergency fund. For one, they cannot be sold in the middle of the night and even selling gold for cash is not easy. Some argue that a gold loan can be availed in such situations, but this will also take a couple of days. </p>.<p>Returns should not be the criteria while choosing the investment for the emergency fund. Volatile investments like equities and products with lock-in like insurance plans are to be completely avoided. NPS Tier 2 is being considered for emergency fund as it has no lock-in. Firstly, the redemption proceeds from NPS Tier 2 get credited after 2 business days provided redemption has been placed before 10.30am. Also, there is an equity component in NPS which makes it unfit to use for contingencies. </p>.<p>Arbitrage funds are also in the radar as they have lower taxation as compared to debt funds. However, arbitrage funds are suggested to be held for at least one year as the arbitrage opportunities may be limited in the short term. Liquid funds and ultra short duration funds are a good choice, since they invest in high-quality, short-term debt instruments. Even liquid funds and ultra short duration debt funds have a redemption cycle of t+1. Thus, having a part of the fund in the savings account would be useful. </p>.<p>A combination of the savings account, fixed deposits and ultra short duration debt funds works well for the emergency fund, as funds would be accessible at all times. All other investments like arbitrage, gold etc. should be used for other goals. </p>.<p>Finally, the fund needs to be replenished if used. Often, due to being preoccupied by the emergency, one forgets to rebuild the fund. </p>.<p>An emergency fund is your financial cushion that turns a crisis into a manageable setback and prevents a debt buildup.</p>